Thursday, September 6, 2007

Barry Ritholtz repeats the popular line that "real unemployment" is much higher than headline unemployment.

U6 is indeed higher than U3. The problem is that value in unemployment stats comes from comparing different points in time and throughout time U6 has always been higher than U3.

When one says, if the "real unemployment rate" was 4.6 the labor market would be tight, you are using your familiarity with U3 to call 4.6 a tight market. Even in the heyday of the late 90s U6 was above 7%. If U6 was 4.6 today the FED would be talking about moving the funds rate upwards 50+ basis points per meeting.

The BLS has data on U6 going back to 1994. The gap between U6 and U3 is procyclical and as one might expect lower now than the average of the last 12 years and only slightly above the roaring 90s.